Business, 23.04.2021 21:50 crummar01

Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company expects to earn $18 million before interest per year in perpetuity, with each company distributing all its earnings as dividends. Levered’s perpetual debt has a market value of $65 million and costs 8 percent per year. Levered has 1.9 million shares of stock outstanding that sell for $98 per share. Unlevered has no debt and 3.8 million shares outstanding, currently worth $71 per share. Neither firm pays taxes. Suppose you were considering purchasing stock in one of these companies. Required:
Which firm's equity shares represent a better value? Equity shares in the unlevered firm are the better buy?

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Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each...

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